The Questor column: Time to take some profits at leaner-looking Whitbread

Long associated with good old-fashioned pubs, a Whitbread establishment today is more likely to serve you up a cappuccino than a pie and a pint.

The pub company-turned-leisure conglomerate last year sold off 239 of its pub restaurants to focus on the Costa Coffee and Premier Travel Inn chains.

It held on to 270 pubs attached to Premier Travel Inns, and another 100 where there is sufficient land to build an adjoining hotel.

It is too early to say for sure but the initial indications are that performance at the pubs is improving. Like for like sales grew by 0.9pc in the year to March, but a more promising 2.7pc in the second half, compared with a decline of 1.8pc in 2005-06.

The company made £497m from the sale of the pubs. It returned £750m to shareholders in the year to March and topped up its pension fund with another £100m, finishing the year with around four times net debt to adjusted earnings.

Now it is rejigging the balance sheet.

The plan is to raise up to £400m in debt, some of which will be secured against the company's hotel and remaining restaurant assets, which will leave it with up to five times net debt to adjusted earnings.

While a portion of this will go into the pension pot, the company has said that the majority of the £400m will be returned to shareholders.

It has chosen this route rather than a sale and leaseback, which would load up the company with much higher levels of debt.

But the move is still likely to discourage some of the parties thought to be eyeing the group.

Rumours that Whitbread may be taken out have been circulating for years, with both trade buyers and private equity cited as potential suitors.

However, as Evolution Securities analyst Nigel Parson points out, private equity should have bid a long time ago if it wanted a bargain.

The company is, he says, effectively doing everything private equity would do. It is restructuring, improving operational performance, raising more debt and considering bolt-on acquisitions.

Last year's results show that its strategy is working. Pre-tax profits beat analyst expectations at £213m, up 24pc on the previous year.

Consequently, Parson argues that some of the bid froth that has been hyping the share price is likely to dissipate following the results.

The company is likely to sell its David Lloyd Leisure fitness clubs in the coming months, which analysts say is worth around £1bn.

While some of this may be returned to shareholders Whitbread could also plough the money back into its hotels business.

The shares are trading on a punchy 26 times next year's earnings, having enjoyed a 13pc rally since Questor recommended holding the shares in December. While the business looks solid for the long term, the "hot" money chasing the share price upwards may desert the stock as bid talk dies down and investors would be wise to take some profits.

York Pharma

Like icarus, Terry Sadler, chief executive of York Pharma, has previously flown too close to the sun.

His previous company, Bioglan, got burned along with several other pharmaceuticals companies a few years ago by a combination of over-ambition and bizarre financing deals.

Both Bioglan and York are in the skincare business. But comparisons end there. York has been run as a tight ship since it floated in April 2004 and shares have risen 400pc.

There is still potential upside in the company. Big pharma has traditionally shunned dermatology as lacking the glamour and the profit margins of other parts of the drugs market. Yet demand is growing fast.

York has an eczema drug, Sabarep, in phase 2 trials. Vampex is at the same stage for psoriasis.

Its most advanced drug, Abasol, fights fungal infections.

York has a big opportunity in all of these markets as current treatments are ineffective or have nasty side effects. Abasol is on the verge of winning regulatory approval so that it can be launched on the market. In the meantime, York is expected to strike a marketing deal with a larger company. Buy.

Redstone

A former darling of the tech boom, Redstone was worth almost £1bn back in 2000.

In the summer of 2001, having seen its market cap fall more than 90pc, the group had to be bailed out by its shareholders. The company was brought back from the brink of collapse and is now starting to gather some momentum.

Redstone chief executive Martin Balaam has been on the acquisition trail to update the company's capabilities. Formerly a telecoms provider, it now offers fixed line telecoms, mobile telecoms, the whole range of converged IP networks - which can stream anything from television to voice to data - and can manage these systems on behalf of companies if required.

Significantly, Balaam then spent £22m on Comunica, an IT company that could run between 10 and 20 major projects on the go. And the projects have started rolling in, with Redstone securing some seriously big deals.

It is preferred bidder to wire up White City, the largest shopping centre development in the UK.

And it has secured a £16m deal to provide IT and communications systems for nine new schools in Lancashire, plus a seven-year contract to manage them. This could lead to other similar contracts. Buy.